R&D Technology

How to claim R&D tax credits: can you claim this valuable tax relief?

In this article I show you how to check if your research and development costs in your small business qualify for R&D tax credits claim.

R&D tax credits? Who for? Me?

Many small businesses say..

“My little business probably wouldn’t qualify for claiming R&D tax credits”

But are they right?

Often, No.

If you’re doing something to advance knowledge in your industry, you’re totally on track to claim this valuable tax credit.

In this article I’ll show you how to easily figure out if you can claim R&D credits for an SME.

With three simple questions we’ll be giving you the info you need to decide whether you can claim or not.

They’ll go something like this:

  • 1: Is the firm attempting to make a scientific or technological advance in its sector?
  • 2: Is there uncertainty as to whether the firm will succeed at achieving that advancement?
  • 3: Does this work relate to the firm’s current trade or a trade it will soon be taking up?

..not just for the cool kids

According to the HMRC research and development tax credit statistics report an considerable range of businesses partake in the R&D credit.

The whole thing is getting bigger and better by the year, let’s have a look.

Claims made per year can be seen in the graph below. We’re interest in the green sections as this is the SME part.

The number of R&D claims by year - Source HMRC September 2016 R&D statistics
The number of R&D claims by year – Source HMRC September 2016 R&D statistics

As you can see most claims are made by SMEs,

It’s widely thought that there’s a large number of SMEs not claiming because they assume they wouldn’t qualify.

But look at this cross section of sectors who do claim:

Industry sectors that make R&D claims
  • Agriculture, Forestry and Fishing
  • Mining and Quarrying
  • Manufacturing
  • Electricity, Steam, Gas, Air Conditioning
  • Water, Sewerage and Waste
  • Construction
  • Wholesale and Retail Sale, trade
  • Transport and Storage
  • Accommodation and Food
  • Information and Communication
  • Financial and Insurance
  • Real Estate
  • Professional, Scientific and Technical
  • Admin and Support Services
  • Public Admin, Defence and Social Services
  • Education
  • Health and Social Work
  • Arts, Entertainment and Recreation
  • Other Services Activities

Is your sector in there? Yes? Then read on my friend..

Here’s what you can gain with a claim

The credit “enhances” your R&D expenditure by 130%.

For example, say £10k of your employee salary expenses was for a particular R&D project, then another £13k would be added to that salary deduction from taxable profit, totalling £23k deductible from profits.

At 20% corporation tax rate this would slice an extra £2,600 straight off your tax bill (£13k x 20%), worth spending the time on right?

“For every £10,000 you spend, you get an extra £2,600 taken straight off your tax bill”

But there’s more..

Now if this claim pushes your company into a loss situation then you can instead “surrender” (i.e. to use up the loss and not carry it forward), that loss and receive a refund to the tune of 14.5% of it.

This represents a cash refund of £0.33 for every £1.00 you spend on R&D

All making sense so far?

Ok, so now let’s hit the three questions.

Question 1: Is the firm attempting to make a scientific or technological advance in its sector?

Now, the golden rule here is that it cannot simply be product improvement for commercial purposes.

That won’t fly because it isn’t attempting to make a scientific or a technological advance to the industry, but rather simply securing competitive advantage for the company.

At this point you may be thinking the bar is too high and that you don’t have the kind of R&D budget for this, but let me put some ideas to you over the next few paragraphs.

Let’s hold on to two operative words; “technological” and “attempt”, I will explain..

Your inner inventor

Many small businesses aren’t scientific firms but one thing is true; many business owners are passionate and innovative about their industry.

How many of you have gone into your business with the intentions of improving the way things are done? Many clients of mine went into business for that very reason – to do things better!

If you’re using your creative talent to build new processes around how things are done in your sector then you are probably forming technological R&D right there.

..and if that change is one for the better, which it almost certainly will be, then it is an advance.

We’ll save the second operative word “attempt” for the the next section.

Question 2: Is there uncertainty as to whether the firm will succeed at achieving that advancement?

Now this is where it gets strict.

The risk must be serious..

The risk of you not being able to complete the technological advancement must be recognisable by others to be a serious unknown which could render the project impossible.

HMRC puts it like this:

Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, isn’t readily available or deducible by a competent professional working in the field.

Which basically means that if good people in your field can’t say for sure that it’s doable in practice, it’s probably good for the claim.

Good evidence here might be discussion papers or opinions by respected people in your field.

..and how did you overcome the risk?

Then HMRC wants you to tell them about how you prevailed against the risk in your project.

I bet you can see the next question coming..

With all this risk what if you haven’t managed to overcome it?

Re-enter our operative word “attempt”

You just need to be working to complete the objective, HMRC understands that by it’s very nature R&D has a high failure rate and therefore awards the tax credit on the merit of your trying.

Getting there

OK let’s recap. If we are doing a claim by this time we’ve identified and described something we do that will advance our industry’s knowledge and therefore be an advance in science or technology. We’ve validated and described our risks within it and have discussed how well we’ve risen to the challenge of beating those risks.

Now all we need to do is make sure it’s actually got something to do with our business!

Question 3: Does this work relate to the firm’s current trade or a trade it will soon be taking up?

HMRC give you the leeway that, if you are not yet in the trade but want to break into that trade then you can still claim.

This is particularly helpful for new entrants who have an idea and want to go ahead and develop something new and benefit the industry at the same time.

My experience is that R&D is a mix of both new-from-scratch projects and lifelong-passion-to-do-things-better.

About the author

Paul Connolly

Paul is a tax practitioner in the UK. He holds a practising certificate from the Association of Chartered Certified Accountants.

He also lectures accountancy and tax at the University of Northampton.

Paul volunteers as a board member of the Northamptonshire Credit Union.

He is also an open data researcher, producing datasets and programming open data driven applications.